Will We Pay Dearly for Traders' Complacency?
The ongoing complacency is scary because big corrections tend to come only after traders get bearish.
I think it was Emerson who said, "Foolish consistency is the hobgoblin of small minds." Well, so is complacency, which is the ding derner of tenuous markets. Sentiment numbers continue to be poor as traders remain complacent despite the scope of correction we've had since the late April peak (by the way, for sentiment figures, I focus on ISEE call/put ratios -- equity only).
I know the SPX is down barely 10% since mid spring, but momentum data imply a much more serious correction than the indexes suggest. Lots of groups/sectors have broken badly; witness the downdrafts among energy, cyclical, financial, and homebuilder stocks. Another "uh-oh" is the RTH (see Sears (SHLD)), which seems precariously close to matching the weakness of the aformentioned areas. This is important because the consumer sector has been an important barometer for the overall markets since its 2009 bottom.
Thus, the ongoing yawn is kind of scary because big corrections tend to end only after traders get bearish. Somewhere down the road, we'll probably have to "pay" dearly for today's ding dern complacency.
However -- and speaking out of both sides of my mouth -- I think "payday" will be later rather than sooner. My guess is we'll trade moderately higher between now and late July/August, then experience a bigger break in late summer/early autumn. My reasons for a short-term bounce are: medium-term momentum is still oversold; very short-term moving averages (60 min) for SPX and NDX are sloping up; the SPX held key support in low 1000s; high-yield corps are holding, though barely; and GLD, which has been an excellent barometer in this cycle, is still quite firm.
How high might we work? My guess is somewhere around SPX 1140-1160, which, I know, is hardly enough to get on anybody's all-star team, but it's sufficient to expect some mini fireworks before the next big setback. However, unless trader complacency abates and skepticism picks up, I think the market will be quite vulnerable in late summer (expect a really strong trading bottom late year because of bullish precedent of presidential cycle). My stop, "it's not gonna work, no mas" for the expected rally is if the VIX goes above 32 and VXN above 33.spt
My favorite group/sectors: mid/microcap Medical and Health Care, Precious Metals; Technology is definitely improving.
Weak sectors include Consumer, Cyclical, Financial, and Energy.
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